Excess entry, ambiguity seeking and competence: An experimental investigation
AbstractExcess entry refers to the high failure rate of new entrepreneurial ventures. Economic explanations suggest 'hit and run' entrants and risk-seeking behavior. A psychological explanation is that people (entrepreneurs) are overconfident in their abilities (Camerer & Lovallo, 1999). Characterizing entry decisions as ambiguous gambles, we alternatively suggest–following Heath and Tversky (1991)–that people seek ambiguity when the source of uncertainty is related to their competence. Overconfidence, as such, plays no role. This hypothesis is confirmed in an experimental study that also documents the phenomenon of reference group neglect. Finally, we emphasize the utility that people gain from engaging in activities that contribute to a sense of competence. This is an important force in economic activity that deserves more explicit attention.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 778.
Date of creation: Oct 2004
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Web page: http://www.econ.upf.edu/
Competence; excess entry; entrepreneurship; overconfidence; Leex;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-CBE-2004-12-12 (Cognitive & Behavioural Economics)
- NEP-ENT-2004-12-12 (Entrepreneurship)
- NEP-ENT-2004-12-13 (Entrepreneurship)
- NEP-EXP-2004-12-12 (Experimental Economics)
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